Commonwealth Bank: 1% of deferred mortgages are impaired, but the figure is expected to grow

Australia’s largest bank has offered some insight into the number of people who could no longer afford to resume their mortgage repayments, but there are fears the figure could grow as relief options expire.

Out of the 158,000 Commonwealth Bank customers who deferred their home loans in July, almost 100,000 have resumed their payments by the end of October

Less than 1 per cent of these customers couldn’t afford their mortgage, CBA said, but eyes remain locked on the 53,000 who have yet to resume their repayments.

“We continue to contact customers with a range of options as they approach the end of temporary loan repayment deferral periods, and have been encouraged by the number of customers who have been able to return to making repayments on their loans,” Matt Comyn said, chief executive of CBA.

“The bank remains well placed and committed to supporting our customers.”

Some people will have to sell their homes. But how many?

Commonwealth Bank held the lion’s share of the approximately 450,000 home loans that were deferred due to the impact of the COVID-19 pandemic. About 14 per cent of these loans have a debt-to-equity ratio of 90 per cent, according to APRA’s September data, with CBA’s share being the highest of the big four banks.

The number of people who can’t afford their mortgage is expected to rise as deferrals end, government stimulus payments expire and the unemployment rate remains well above its typical level.

Of the 53,000 CBA customers unable to repay their mortgage, about 31,280 have chosen to extend their deferral by up to four months.

Commonwealth Bank has pledged not to sell the homes of customers impacted by the pandemic until September next year, provided they had been making their regular repayments. The announcement was met with praise from Financial Counselling Australia.

Late mortgage repayments are at a high

Home loan delinquencies, where repayments are 30 days late or more, are up across the country, according to Moody’s Investor Service.

“Mortgage delinquency rates increased in 40 Australian regions over the year to May and fell in 47 regions,” the analysts said.

“Over the next year, mortgage delinquency risks will be high in regions with large economic and labour market dependence on industries such as tourism, hospitality and retail, which have been hit hard by coronavirus disruptions.”

Impairments are likely to double: RBA

The Reserve Bank of Australia (RBA) anticipates 15 per cent of people on a deferred mortgage will not be able to resume repayments.

“Some borrowers may be able to restructure their debt (such as by extending the term or temporarily switching to interest-only payments) and lower their repayments,” it said, in its biannual financial stability review.

“However, some borrowers may need to sell their property to repay their debt.”

The nation’s central bank originally estimated 2 per cent of mortgages would be impaired, provided the unemployment rate reached 10 per cent. The RBA has since revised its unemployment projections to 8 per cent.

The property market has stabilised after five months of continuous losses, but economists, wary a sell-off could occur because people can’t repay their mortgages, warned the growth could be short lived.

“(The property market is) being supported by various support measures and the rebound in the sales activity partly reflects the unleashing of pent up demand and supply,” Shane Oliver said, chief economist at AMP.

“The overall outlook into next year remains messy with a high risk that the negatives could reassert themselves, particularly in Melbourne and inner city Sydney.”

Concerns equity could fall into negative for a few

A sell off of properties could lead to negative equity, a phenomenon where people owe more money than their property is worth.

“If many borrowers were to attempt to sell because they are unable to meet their repayments, and demand is weak, housing prices could fall,” the RBA said.

“Large and sustained price falls could lead to losses for borrowers and lenders.”

About 3 per cent of loans already have negative equity, the RBA said.

Banks are trying to avoid the worst case scenarios by using a financial toolkit to help keep the number of mortgage defaults to a minimum.

These include extending deferrals until 31 March 2021, and lowering home loan repayments by either converting loans to interest only, or stretching them over a longer period of time.

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